As of press time, the Argentina province of Chubut was approaching the finish line for the issuance of a $150 million deal backed by oil and gas royalties.
Interestingly enough, earlier in June, Fitch Ratings had put out an affirmation of its 'B' rating on $234 million of royalty-backed notes originated by the province of Salta. What that transaction has gone through since the country's epic default in late 2001 could prove instructive for buyers of Chubut, which should include both cross-border and local folk.
Greenwich-based arranger BCP Securities is selling to the former, while Banco de Valores and Banco de Chubut are targeting the latter.
BCP and Banco de Valores either declined to comment or did not respond to a request for comment.
Chubut's deal, with a legal final of 10 years, is expected to close by the fourth of July.
The Salta transaction, which came out mere months before the sovereign default in 2001, is now amortizing on schedule with a current balance of $105.6 million. Rising gas prices and stable oil prices have buoyed recent flows, reversing the trend caused by lower prices in 2009. Coverage levels were 2.25 times in March 2010.
The deal however, has been rattled over and over again during its life. Only two years ago - well after the dark days of 2002 - Salta's provincial government publicly expressed its desire to restructure the terms of the notes. The fact that some of the structural elements were onshore made it seem to some participants that it could divert flows if it were determined enough.
The Salta transaction bears an 11.5% coupon and has a 14-year maturity. Lehman Brothers was the lead. Collateral consists of 80% of all royalty payments owed the province by 17 private companies operating concessions in the oil and gas sectors.
As it turned out, the government did not end up tinkering with the deal, though due to the drop in flows payments on principal were deferred for a period.
With Salta now seemingly out of the woods - even though Fitch will not raise the rating until it is convinced the risk of restructuring has abated and performance flow continues to improve - the sector can still claim that none of its deals defaulted through the worst of the Argentine crisis. In contrast, a number of straight provincial deals did default.
The asset class was never exactly a crowded field. The only other provinces with royalty-backed deals included Mendoza and Tierra del Fuego before the crisis and Neuquen in 2006.
While the track record of the asset class is a positive for the Chubut deal, there are still ways for the government, either provincial or federal, to disrupt flows. Caps on energy prices, for instance, eroded the Salta flows and could affect the Chubut one as well.
The current and most recent government administration has shown no qualms about intervening in Argentina's energy sector, exercising control in part by capping prices. In its report on the Chubut deal, Moody's Investors Service said, however, that outright nationalization is a low-probability scenario.
"An Argentine royalty deal isn't as good as an offshore deal but it's not as bad as [vanilla] provincial deal," a market source familiar with the sector said.
The Chubut transaction, at any rate, is not investment grade. Moody's has the A tranche at 'Ba3' on the global scale and the B tranche at 'Ba2.' BCP is the arranger for the former piece, which is payable in U.S. dollars, and Banco de Valores and Banco de Chubut for the latter, which is paid out in Argentine peso but still linked to the dollar. The legal final maturity is 10 years.
Among the deal's strengths is the ability to pay off completely even in an extreme scenario of production dropping 50% and prices 60% from a base case, Moody's said. The true sale is governed by Argentine law but the bonds themselves will fall under English law.
The transaction has only a single obligor: Pan American Energy (PAE), which 60% owned by presently beleaguered BP and 40% by Bridas Corp. PAE owns the concession to operate in certain areas of the province.
Moody's characterized as "excellent" PAE's track record in Chubut's Cerro Dragon fields, which it took over from YPF in January 2007. Those deposits make up the bulk of PAE's reserves in the province. The concession agreement sets royalties at 12% of the "computable production" of oil and gas, valued at wellhead prices.
Pan American Energy is no stranger to the capital markets.
In April, the company sold $500 million in an 11-year 144A private placement.